The EBA updates monitoring of Additional Tier 1, Tier 2 and TLAC/MREL eligible liabilities instruments of European Union institutions

The European Banking Authority (EBA) today published an updated Report on the monitoring of Additional Tier 1 (AT1), Tier 2 and total loss absorbing capacity (TLAC) as well as the minimum requirement for own funds and eligible liabilities (MREL) instruments of European Union (EU) institutions. Today’s update provides new guidance on the prudential valuation of non-CET1 instruments and on other aspects related to the terms and conditions of the issuances.

This Report builds upon the 2023 update with substantial amendments made. In particular, the EBA clarifies that the prudential valuation of capital instruments should reflect their actual loss absorbency capacity, meaning that such instruments should be measured on the basis of the amount of Common Equity Tier One (CET1) capital that would be generated in the event of a write-down or conversion, being the carrying amount with no adjustment.

In addition, the Report addresses the approaches followed by some institutions to timely reflect from a prudential perspective FX effects on AT1 instruments classified as equity and stresses the need to ensure a consistent application over time when these approaches are used.

The Report also specifies the conditions under which different loss absorbency mechanisms (conversion and write-down) and trigger levels can operate simultaneously within the same institution, with the need in particular to fully adhere to the EBA existing guidance and AT1 standardised templates.

Other aspects covered in the Report include clarifications and recommendations on the redemption of own funds and eligible liabilities instruments, on early redemption clauses, and on the need to include contractual bail-in recognition clauses in own funds instruments issued under English law.

Going forward, the EBA will continue to monitor the quality of the AT1, Tier 2 and TLAC/MREL instruments and stands ready to provide additional guidance where necessary.

Legal basis and background

In accordance with Article 80 of the CRR on the continuing review of the quality of own funds, ‘the EBA shall monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation’.